Having offloaded its non-core subsidiary, Hardware and Lumber Ltd, last December, in the first quarter of 2016, GraceKennedy Ltd (GKC) dissolved its non-operating subsidiaries. The profit from that exercise together with much improved profitability at its core operations helped GKC to generate a robust half-year result.
In the context of a more positive economic environment, these results provided a sustainable platform on which to build its future growth and precipitated a decision to implement a three-for-one stock split, effective August 11, 2016.
We will now review GKC's performance for the half-year ended June 2016.
Changes in financial position
Total assets grew by 10.2 per cent to J$119.7 billion from J$108.7 billion as at December 2015.
Investment securities increased to J$25.8 billion from J$21.8 billion. In addition, loans receivable rose to J$24 billion from last December's J$22.6 billion, mainly reflecting growth of 6.3 per cent in the loan portfolio of its banking subsidiary, First Global Bank.
Receivables advanced to J$14.6 billion from J$11.6 billion. Property, plant and equipment rose from J$8.5 billion to J$9.4 billion.
Cash and deposits improved by 15.4 per cent to J$11.4 billion from J$9.9 billion. The current cash and equivalents portion was J$10 billion, which was mostly helped by J$5.7 billion generated from operating activities.
Total liabilities rose by 11.6 per cent to J$77.4 billion from J$69.3 billion.
Deposits at First Global Bank rose from J$24.3 billion to J$29.5 billion or by 21.6 per cent.
Similarly, trade and other payables increased by 19.1 per cent to J$20.5 billion from J$17.2 billion.
However, bank and other loans declined to $13.3 billion form J$13.9 billion. Also declining was securities sold under agreements to repurchase; this item closed at J$8.1 billion from J$8.6 billion.
Total equity increased from J$39.4 billion to J$42.4 billion, of which J$1.6 billion related to non- controlling interests. This left J$40.8 billion as shareholders' equity.
Share capital declined to J$479 million from J$568 million. This reflected the net of the issuance of new shares (J$35 million), the transfer of treasury shares to employees (J$31 million), but reduced by J$155 million, which reflected the purchase of 1.4 million treasury shares.
Other comprehensive income of J$259 million, transfer of treasury shares to employees (J$8 million) and the transfer from capital reserves of J$62 million boosted capital and fair value reserves to J$5.5 billion from J$5.1 billion.
Retained earnings improved from J$25.9 billion to J$28.4 billion. The current period's profit of J$2.5 billion and other comprehensive income, reflecting the re-measurement of post-employment benefit obligations of J$0.6 billion, enhanced the brought forward figure. Meanwhile, dividends to shareholders of J$258 million and transfers to capital (J$62 million), banking (J$109 million) and other reserves (J$202 million) reduced the closing balance.
Banking reserves rose to J$2.7 billion from J$2.6 billion while other reserves fell marginally to J$3.7 billion from J$3.8 billion. In the latter's case, this mostly reflected negative other comprehensive income, which comprised mainly of foreign currency adjustments.
Now with 330,170,000 shares outstanding, each share had a book value of J$123.49 (December 2015: J$115.07).
Income and profits
Revenues in the second quarter of J$21.99 billion (2015: J$19.91 billion) brought year-to-date revenues up to J$44.1 billion. This reflected an improvement of J$4.8 billion or 12.3 per cent over the 2015 half- year of J$39.3 billion.
Expenses rose by J$4.03 billion or by 10.6 per cent to J$42.1 billion from 2015's J$38.1 billion. Consequently, the gross margin advanced by J$821 million or 70.70 per cent to J$J$1.98 billion from J$1.16 billion.
Other income more than doubled to J$1.54 billion from J$712 million. This figure included J$606.5 million, most of which related to the profit on the disposal of non-core investments.
Interest income on non-financial services rose to J$182 million from J$169 million. Also, interest expense on non-financial services increased to J$350.6 million from J$334.1 million.
The share of results from its associates climbed by 70.8 per cent to J$300.9 million from J$176.1 million. It two major associated companies are CSGK Financial Holdings in Barbados (40 per cent) and Dairy Industries Jamaica Ltd (50 per cent).
Dairy Industries produces cheese and yogurt for the local and export markets. In the first half of the year the happy combination of higher sales and lower raw material prices hugely enhanced the bottom line.
These changes resulted in a pre-tax profit for the period of J$3.65 billion. That outturn was J$1.77 billion or 93.7 per cent greater than the J$1.88 billion earned for the comparative 2015 period.
After allowing for taxes of J$949 million and minority interests of J$245 million the profit attributable to shareholders registered at J$2.46 billion. That was J$1.16 billion or 90.1 per cent higher than the J$1.29 billion recorded for 2015.
These results translated into 2016 diluted EPS of J$7.42 compared with J$3.90 for 2015.
Segment performance
The food trading segment benefitted from a strong improvement in both its domestic and international operations. Although revenues were only 5.4 per cent higher, pre-tax profit more than doubled. Notably, its international operations operate in the UK, the USA and Canada, which provides substantial hard currency earnings. The integration and streamlining of its operations in the USA continue to bear fruit.
Its newest Hi-Lo supermarket in Liguanea, St Andrew also houses a branch of First Global Bank and an outlet of GraceKennedy Money Services. This one-stop shopping experience is expected to be rolled out at other locations.
Revenues at the banking and investments segment were 15.4 per cent higher than the previous half- year; despite this, pre-tax profits fell by 15.8 per cent. On a positive note, the sale of Petroleum Company of Jamaica Ltd for J$2.3 billion generated a one-off fee to GK Capital Management, which served as the lead negotiator for the deal.
The insurance segment registered a 10 per cent growth in revenues; this was accompanied by a 90 per cent improvement in pre-tax profit. Fuelling these results was the strong increase in general commission income from Allied Insurance Brokers.
Revenues at the money services segment grew by 17 per cent while pre-tax profit expanded by 31.7 per cent. Interestingly, this segment normally generates positive finance income; in 2016, this moved to a negative position, which was probably related to the temporary foreign exchange limits imposed locally (in Trinidad) some months ago that have now been lifted.
A new mobile money product is in the pilot phase and, following regulatory approvals, is expected to be rolled out in the near future.
The consolidated adjustment column moved from a pre-tax loss of J$103 million to a profit of J$666 million. It is within this grouping that the special one-off profits, referred to earlier, are housed.
Share price movements
GKC's share price ended 2015 at J$81.25, but by April 8, 2016, the price had slipped to J$79.80. However, the release of its first quarter results on the afternoon of May 12 showed a robust increase in profit for the period. This information helped to push the price to J$84 at the end of that day.
Two weeks later, on May 26, the price closed at J$94.86, then on the following day, May 27, it closed at J$109.21.
The demand for the share remained relentless with the price moving first to J$124.99 on June17, then, by August 2, it was quoted at J$127.70. Just before the stock split became effective on August 11, the price closed at J$124.46. That pre-split price resulted in an adjusted opening price of J$41.49. This is one third of the previous price to adjust for the two new shares that were allocated to existing shareholders.
Relating the opening price of J$81.25 to the closing price last Friday of J$44.55 (about TT$2.36), shareholders are now significantly better off. An investor who held 100 shares at J$81.25 last January (then worth J$8,125.00) now has 300 shares of GKC worth J$13,365; this reflects an appreciation of J$5,240.00 or 64.5 per cent in less than 8 months.
That investor would have also received an interim dividend in May of J$0.78 per share. In September, a second interim dividend of J$0.34 will be paid. That dividend is equivalent to J$1.02 before the split became effective.
On the Trinidad exchange, the price movements have been similar, but less enthusiastic. After ending 2015 at TT$4.05, the price rose to TT$5.00 on March 2, 2016. Then, by June 15, the price ended at TT$5.49. It reached TT$5.90 on July 27 when 40,000 shares traded. Although there is outstanding post- split bids at TT$2.01, for more than two weeks no trades have been executed on the TTSE.
How does the price on JSE relate to the price on the TTSE?
Using an exchange rate of J$18.89 to TT$1, the post-split price in Trinidad of TT$1.97 reflects J$37.21 or J$111.64 before the split. Is it that the price on the Jamaican market is inflated or that the local price is too low? Objective data suggests that the price on the TTSE should be higher.
Next week, we look Guardian Holdings Ltd's half-year performance.